Foolish Forecast: Still Fixing Up Lowe's

Home improvement superstar Home Depot (NYSE: HD) reported earnings on Tuesday, and the news wasn't pretty. Will handyman's helper Lowe's (NYSE: LOW) fare any better when it reports its own Q2 2007 numbers? They're due out just the other side of this weekend, you know.

What analysts say:

• Buy, sell, or waffle? Twenty analysts follow Lowe's, meaning three have lost interest since the beginning of this year. A full dozen rate Lowe's a buy, seven more a hold, and one a sell.
• Revenue. Wall Street expects to see sales rise 5.5% to $14.13 billion.
• Earnings. It's predicted that profits will add a penny to make $0.61 per share.

What management says:
Like its fellow home improver, Lowe's is in the midst of a buyback, promising to repurchase as much as $3.8 billion of its stock through fiscal 2009. What's got Lowe's so greedy, and so interested in making an "indication of Lowe's financial strength," as CEO Robert Niblock put it back in May? I can't say for sure, but it seems likely that Lowe's boss anticipated some serious buying opportunities following last quarter's report of a 6% decline in same-store sales, and a fall in profits twice as big.

What management does:
Whether that proves to be a prudent decision will come down to two things: First, can Lowe's grow its sales in the face of a pretty ugly housing market, getting uglier every day as the subprime debacle spreads? And second, can it maintain its profit margins on those sales it does make? On the first point, analysts seem optimistic (see above). But on the second, while we're seeing surprising strength in Lowe's gross margins, the firm's operating and net results appear to be deteriorating.

Margins	2/06	5/06	8/06	11/06	2/07	5/07
Gross	34.2%	34.4%	34.3%	34.4%	34.5%	34.5%
Operating	11.0%	11.3%	11.2%	11.3%	11.1%	10.7%
Net	6.4%	6.7%	6.7%	6.7%	6.6%	6.4%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Whether the housing market cooperates or not, Lowe's seems determined to grow those sales, come heck or high interest rates. According to the guidance it gave back in May, the company admits that same-store sales may well continue to decline, and end up down 1% or 2% by year-end. But by adding as many as 160 new stores this year, Lowe's aims to increase its total sales nonetheless, by about 7%.

Marginwise, the news is less optimistic, with Lowe's forecasting a decline of 70 to 80 basis points, resulting in per-share earnings of about $2, up perhaps a penny or four from last year's net.

Does Lowe's archrival see things working out any better than this?

• Home Depot Has Work to Do
• Foolish Forecast: Will Home Depot Fade or Glow?

And don't forget to check out what our team of value hunters at Motley Fool Inside Value has to say about the two companies. Home Depot is, after all, one of our recommendations, and we're watching both it and its nemesis quite closely. Take a free, 30-day trial of the service to get the Fool skinny.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool's disclosure policy says you can invest in it. We can help.